Such a perception has become the underpinning of agency theory, now an important component of the literature of financial economics. The agency theoretical view is that an agent will not take decisions which attempt to maximize the long-term value of the firm, but rather will take decisions out of self' interest to benefit the agent to the detriment of the principal.

The view of man taken by agency theory, by contrast to stewardship theory, is that people cannot be trusted to act in the public good in general and in the interests of the shareholders in particular: they need to be monitored and controlled to ensure compliance. Such check and balance mechanisms, obviously, incur agency costs. Jensen and Meckling argue that firms should incur such agency costs of enforcement to the point at which the reduction of the loss from non-compliance equals the increase in enforcement costs.

Examples of such agency costs being incurred in practice include board structures which emphasize outside, independent directors, committees of the board comprising independent directors to be concerned with audit, top management remuneration and the nomination of new directors, and the separation of the 1 roles of chairman and chief executive officer.

Elaboration of agency theory applied to governance issues is contained in the readings.

Further theoretical insights relevant to corporate governance on an international dimension may be found in cross-cultural studies. Research in this area has hardly begun, but suffice it here to comment that both stewardship theory and agency theory are Western in context, assuming rational, unemotional, contractual relationships based on the desirability of order with appropriate procedures and rules, with participative and open styles of relationship and ready access to information. Corporate governance in other parts of the world, throughout most of the Pacific Basin for example, must be practiced within different philosophical traditions, where responsibility, ready acceptance of hierarchical control, respect for authority, paternalism, collectivities rather than individual, and secrecy may be the norm.

Task 2. Talking Point 1

Work in groups of three, consult Speaking References p.126–130 and discuss the following:

▪ What qualities/features does deciding on board nominations depend on?

▪ Expand on being “the wise man”, “the specialist”, “the window-on-the-world”.

▪ Expand on being “the contact-person”, “the figure-head role”, “the status-provider”.

▪ Expand on being “a judge”, “the catalyst”, “the monitor or supervisor”, “watchdog role”, “confidant”, “the safety-valve”.

▪ How much do the basic companies ordinances differ in different countries? Take into consideration: laws rooted in Roman law/within the case-oriented legal structures.

▪ What is the underlying basis of power to nominate and elect directors?

▪ Who does hold the confirming power?

▪ What are the basic responsibilities of the shareholders?

▪ Expand on acting honestly in good faith

▪ What are the main duties imposed on directors?

▪ What is the nature of man in accordance with the original corporate concept?

▪ Expand on stewardship theory/Criticism on “stewardship theory

▪ Expand on the agency theory.

Task 3. Reading 2

Getting started

▪ Before reading the text, discuss in small groups what role plays the board of directors in the governing the company.

▪ Skim the he text to find out if your ideas are similar to those in the text.

▪ While reading the text, pay attention to the words in bold and try to explain them. Consult Vocabulary p. 139–140.